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Netflix Inc. Can Still Head Lower on Thursday

Investors looking for another sign that Wednesday afternoon's earnings report from Netflix(NASDAQ:NFLX) will be solid can turn to UBS for support. Shares of the leading premium video streaming service opened sharply higher on Monday after UBS analyst Doug Mitchelson upgraded the stock from neutral to buy.

He also dramatically boosted his firm's price target on the stock, from $370 to $565. His bullish update is based on increasing usage trends both here and abroad. Mitchelson leaned on homegrown research out of the UBS Evidence Lab, showing healthy usage among iPhone and iPad users. Outside of the notable exceptions of France and Germany -- two highly competitive European markets that Netflix just entered late last year -- iPad and iPhone users are doing a lot of streaming through Netflix's app worldwide.

This naturally bodes well for Netflix's growth outside of the U.S., since less than a third of the streaming platform's 57.4 million subscribers are international accounts. Mitchelson is encouraged by the prospects abroad, expecting Netflix by 2020 to be an entertainment reality for a fifth of the 500 million international homes. Yes, that's 100 million streaming accounts five years from now.

Momentum is in Netflix's corner. The stock has climbed in six of the past seven trading days through Monday, and UBS is not alone in warming up to the reborn dot-com darling. Analysts at Citigroup and BMO Capital Markets jacked up their price targets late last week. You usually don't see so many analysts rallying behind a stock ahead of a quarterly report

There's also Netflix itself dropping hints that it will have some good news. It turned heads last week by tweeting that it served up 10 billion hours of viewed content during the first three months of the year.

The beefy milestone suggests usage -- and therefore retention and probably subscriber growth -- are holding up swimmingly this year. There was also Friday's SEC filing ahead of Netflix's annual shareholder meeting in early June, in which it proposed to boost its authorized share count from 170 million to 5 billion. This would seem to imply that a stock split announcement could come soon,

Stock splits are zero-sum games in theory, but they also suggest a company is bullish enough about its near-term prospects to slice its share price lower in exchange for offering more shares.

Great expectationsWith analysts and Netflix dropping hints of a blowout quarter it would naturally be dangerous to short a stock with this kind of favorable momentum. However, we also can't assume the stock will move higher after Wednesday afternoon's report.

Netflix wouldn't be the first company to deliver a monster report only to see its stock falter the morning after. After all, much of Netflix's success is already baked into the stock. It has been on a tear in recent days, and it was already trading 33% higher in 2015 before Monday's pop following the UBS upgrade.

Long-term investors shouldn't care. As long as the fundamentals are solid and improving -- and that's what analysts and Netflix itself seem to be suggesting -- the long-term bullish outlook should prevail over the near-term stock price fluctuations. Netflix's stock may slip on Thursday after a blowout report, but that's not a bad thing.

Author

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time with more than 20,000 bylines over those 22 years. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he splits his time living in Miami, Florida and Celebration, Florida.
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